Defending Executive Compensation, Sort Of


Guest Blogger: Don Sears

A little peeved that TARP money helped fund executive bonuses in 2008? Some professors in Pennsylvania see it differently.

Wharton School of Business-- Harvard's main business-school rival-- has some professors who are examining executive compensation issues in the age of government intervention. But calling this article a wholehearted defense of bloated compensation (it's entitled "Outrage over Outsized Executive Compensation: Who Should Fix It and How?") isn't exactly on the money.

Accounting professor Dr. Wayne Guay reacted to the statement from Treasury Secretary Geithner on the possibility of extending $500K tax deduction caps on all U.S. companies:

Guay said further curbs on compensation might be justified if proponents can prove that high pay packages contributed to the current economic crisis. Given the global nature of the economic meltdown, however, he suggested that the cause of the collapse was not supersized U.S. executive compensation. "We don't have a massive corporate governance breakdown in terms of ... executive compensation." At the same time, "there are a lot of public relations issues floating around. Many companies have come forward needing assistance, and they can't afford to be giving the public a feeling that they're being excessive in any way, shape or form."

That seems to miss the point to me. The stock prices, lack of earnings and poor performance should be reminder enough that TARP companies are TARP companies for a damn good reason: They screwed up and few trust them right now.

The most out of touch argument comes from finance professor Dr. Alex Edmans when he suggests that "the public accepts outsized salaries in sports and entertainment; why not business, he asks."

If the Texas Rangers, New York Yankees or anyone else want to pay A-Rod obscene amounts of money to play baseball, take 'roids, and date Madonna, then go ahead. But not when it's our tax money and not when a company has failed to live up to its end of corporate governance.

The issue framed here, I think, is executive accountability, not direct linkage of the entire global collapse linked to job performance. Yes, bonuses are a great motivator when the company performs well, but when it doesn't, they probably should deflate and dissipate.

Disconnect? Other professors in the article attempt to explain the disconnects between executive compensation and, well, reality, now. Management professor Peter Cappelli explains:

During the past decade... CEO compensation has been going up at twice the rate of overall pay... CEOs and other top executives see these historically high rates as the new normal. When the economic environment is good, it is easy to pass along pay increases. When the tide reverses, however, it is painful to go back, and executives resist any push to return to prior levels.

Another reason executives are perceived by the public as out of step with reality is that they base their own expectations about compensation selectively... Executives look at what other senior managers are making and choose to see only those who are paid higher. As each package is negotiated, pay across the corporate landscape inflates even more. "It's easy to choose self-serving comparisons, and then it is off to the races with what is essentially bad governance."

Makes sense, or rather, it did. But it's time to face the crowd: We all want pay for performance, but when it is accountable and worthy. Getting executives to act like shareholders seems like a way of balancing accountability. But does it work? As Prof. Capelli later points out, U.S. execs are too bullish on quarterly performance: "Compared to the rest of the world, U.S. companies are obsessed ....They are willing to twist themselves into knots to manage short-term performance. So it's not as simple as just saying we should get them to act like shareholders."

Great point. Longer term incentives with shareholder caveats may be in order.


25 Comments for "Defending Executive Compensation, Sort Of"

  • zebhead February 18, 2009 9:55 am

    ...tes this concept for public consumption. There are at least 50 people in my organization alone that could easily do the CEO�™s job...some much better. A shortage of talent to do this job is not a limitation. Finally corporate Boards have clearly failed to protect the shareholders they were elected to serve. In many cases the Board members have egos even bigger than the executives and become too "chummy" with the execs to properly regulate their activities. In most cases the Board members come to the Board meetings, collect their fee and socialize. Very few tough issues get to the Board as the execs see to that...until things blow up and damage control is no longer possible.

  • P Hatchett February 17, 2009 2:19 pm

    I do not see any justification for compensation at a million dollars yet along $500,000. Out of touch, you bet! We can't pay a living minimum wage, but we can compensate someone at thousand's of dollars. We are forcing people who were making a living wage to get use to substantially less income, because of moving jobs oversees. One of the conditions for aiding the auto companies is that the workers pay be more in line with foriegn wages. I for one think there is gross unfairness in the process and that the process needs to be more sensible. I'm for downsizing executive pay in the same manner as we are downsizing worker's pay. Stockholders should agree, because the profits are going to pay the exorbitant wages. The compensation process that supports the current system is ABUSIVE and needs to be rethought!

  • Charles Ashbacher February 17, 2009 9:38 am

    The article is cited is just one more indication of a mindset that avoids the reality. Public money had to be pumped into these companies because of bad executive decisions and HAD to be done to avoid a failure of the global banking system. To argue that high pay is still justified in such circumstances is absurd.

  • Jon Smith February 16, 2009 6:43 pm

    Those stinkers should not get a dime in bonuses for "profits" gained by laying off US workers. The workers did not drive the ship onto the rocks. As a Sony head once said, "It was managment's risk." Layoffs are symptoms of managment failure.

  • Mike Swiderski February 16, 2009 9:35 am

    I am an executive for a large middle market company. Since we are an ESOP all of our salaried employees are the owners, but we have independents on our BOD. We have a bonus plan covering essentially all non-bargaining employees and a super bonus plan covering only the executive management group. The latter plan under the guise of performance does perform extremely well when the company peaks during its economic cycles. For those of us in this group we are able to cash out at the peak with huge sums. It is unfortunate for our other shareholders that they must see their retirement nest egg dwindle as the cycle heads downwards. We are confident though that the economic cycle will one day head upwards and restore their lost retirement fund. But when it peaks again we in the executive management group will be able to cash out again. Now isn't that fair!

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